Monday, July 9, 2012

Moody’s Investors Service’s Richard Lane today writes in a note to clients that the “surging” pile of cash of U.S. tech companies that is parked overseas reached $227.5 billion out of a total $457 billion at the end of the March quarter, just counting the holdings of the companies that have $2 billion or more in cash and liquid investments combined.

... you would be very tempted to think that U.S. companies with large overseas cash holdings are depriving the U.S. economy of much needed cash and investable funds. But you would be wrong.

When a U.S. corporation refrains from repatriating profits it has earned overseas, this does not necessary deprive the U.S. economy of those funds. That's because the decision to hold cash in overseas accounts is mainly an accounting and taxation issue, not a decision about where the cash should be invested. A great deal—most likely the vast majority—of the overseas-held profits of U.S. corporations is actually invested in U.S. banks, bonds, and equities. Apple and many other companies have investment shops in Nevada, among other places, where their overseas profits are managed. That cash is held in the name of a foreign company in order to avoid being double-taxed—first at the foreign location, then in the U.S. if the funds are repatriated. It is invested in much the same way that domestically-sourced profits are invested. If there is any "culprit" here it is the U.S. tax code, which insists on the double-taxation of foreign profits. Companies with foreign-sourced profits are quite sensibly trying to avoid that onerous taxation burden by leaving the money in their offshore entities. The only one being "deprived" of these foreign profits is the IRS, not the U.S. economy.

"In order to motivate businesses to bring this money back to the U.S., the new administration and Congress should consider legislation similar to a bipartisan 2004 law, The American Jobs Creation Act. This law incentivized U.S. businesses to bring $360 billion of foreign subsidiary earnings back into the U.S. at a reduced corporate tax rate of 5.25% for one year. A survey of several hundred of these companies found that they used, on average, 25% of those funds for U.S. capital investment, 23% for hiring and training of U.S. employees, 14% for U.S.-based R&D, and 13% for U.S. debt reduction."

You make a good point. Overseas profits can't be used by the parent company for new investment unless taxes are paid here, but they are available to the economy in general. That's not ideal, to be sure, but it is not as bad as most people have been led to believe.